Deciphering Escalation Clauses

Dear Phyllis,
I look forward to your real estate advice. My daughter and her husband wrote an offer for a home in Thousand Oaks. There were eight offers, and the sellers accepted an offer with an escalation clause. My daughter is the backup buyer. I don’t believe you have addressed this topic before and I would appreciate a little more insight into deciphering escalation clauses. They don’t seem fair to buyers.
Jenna

Dear Jenna,
Escalation clauses have been used for years. I am surprised the seller’s agent didn’t issue a counteroffer to all the buyers with the escalated amount. Let’s assume the successful buyer wrote an offer for $2,000,000 with an escalation clause of $10,000 more than any other offer up to $2,250,000. The listing agent might have simply countered every buyer at $2,250,000 or the highest and best price.
Pros of using an escalation clause in a real estate offer:
1. Demonstrates seriousness and competitiveness: Including an escalation clause in your offer shows the seller that you are serious about buying the property and willing to outbid other buyers. It can help make your offer stand out among multiple offers.
2. Simplifies negotiation process: With an escalation clause, you don’t have to engage in back-and-forth negotiations whenever another offer comes in. The clause automatically increases your offer by a predetermined amount above any higher competing bid.
3. Sets a price cap: Including a capped amount in the escalation clause ensures that you don’t exceed your predetermined budget. Once the bidding surpasses your cap, your offer will no longer increase, protecting you from overpaying for the property.

Cons of using an escalation clause in a real estate offer:
1. Sellers’ perception and motivation: Some sellers may view an escalation clause negatively, perceiving it as a sign that you were initially willing to pay more and wondering why you didn’t offer the higher amount outright. This perception could affect their motivation to negotiate with you.
2. Possibility of multiple counteroffers: The seller may issue a multiple counteroffer, which includes your capped price and requests for other favorable terms. This could result in a more complex negotiation process and might not necessarily guarantee that you secure the property.
3. Listing agent preference: Not all listing agents are receptive to escalation clauses. Some agents prefer buyers to submit their best and final offers upfront rather than relying on escalation clauses. If the listing agent dislikes or discourages escalation clauses, it could create a negative impression that may impact the seller’s decision.

I hope this explanation helps. By the way my sister got her dream home by being a backup offer.

Best of luck to your daughter and son-in-law.
Phyllis